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 Dear
Dr. Don,
I am currently renting but plan on buying a house in Seattle
worth $332,000 using a 30-year fixed rate loan. My gross yearly income is $150,000
with total expenses of about $2,500 per month. I have no personal or student
loans, no credit card debt and have $50,000 in savings.
Do
you recommend 20 percent down or should I do 80/20 with first and second mortgages?
I may keep the house for three to five years and then rent it out. Is buying a
house now a good investment?
-- Joy Judicious
 Dear
Joy,
An 80/20 piggyback mortgage is for someone that
doesn't have any money to use as a down payment.
You pay up on the interest rate for the second
mortgage because of the additional risk that lender
is shouldering since you have no equity in the
home. With your income and savings, there's no
reason for you to pay those rates on the second
mortgage.
Your savings aren't quite enough
to meet that 20 percent goal, so you have to choose
between using only a first mortgage and pay private
mortgage insurance, or PMI, or do a different
type of piggyback mortgage. For example, an 80/10/10
has you making a 10 percent down payment.
I don't know anything about the
market for real estate in the Seattle area and
can't comment on whether the home purchase is
a good investment. If you don't expect housing
prices to appreciate over the next three to five
years in that market, then buying the home as
an investment is an issue.
With an annual income of $150,000
and current annual expenses of $30,000 you should
be able to pay off the second mortgage fairly
quickly. You could also look at a conventional
financing with private mortgage insurance with
an eye toward paying down the loan to the point
where the lender would be required to cancel the
PMI policy. The Bankrate feature"PMI
industry fights back against piggyback loans"
explains how to decide between the two competing
loan structures.
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